March 8, 2010

Controlling Health Care Costs in 3 Easy Steps

As I mentioned in an earlier post, I have a hobby of discussing politics with colleagues from other countries. Lately, a number of these conversations have centered around the subject of health care. One of the more common statements parroted by the progressive crowd is that we need health care reform to “control the free market” capitalists that are driving health care costs out of control. Hearing that last sentence alone should be enough to convince any of us that a government education is bad for our children.

“It’s not that liberals are ignorant, it’s just that so much of what they actually know is not true.” – Ronald Reagan

You see, in a truly free market (in spite of the hot air coming from elected officials) it is impossible to make obscene profits for an extended period of time. Markets tend to self-correct. If there is a market where high profit potential exists, additional entrants will enter the market. The increased supply from additional market entrants tends to lower prices (and assuming static costs it will lower profits as well). The higher the difficulty in entering the market, the greater the profit potential that is required for additional entrants into the market. There could be many reasons for a potential competitor to resist entering into a new market. In something like semiconductor fabrication there is a significant amount of capital required to build the manufacturing lines. So, there has to be enough profit potential to entice a new entrant. Intellectual property concerns, or other factors could delay entry into the market. But, truly free markets in the real world (if they ever exist) tend to prevent monopolies. So, the best way to create a true monopoly is to lobby your friendly neighborhood bureaucrat. If the government can prevent your competitors from entering your market, you can continue to make artificially high profits.

What does this have to do with health care? Let’s go back to our economics lesson. If you were operating a hotel and all of your rooms were constantly filled what types of things might you do? Perhaps you would increase your nightly rates. You might, also, expand. If you could not increase rates because you were contractually obligated to sell your rooms at a particular rate, you would certainly consider expanding to help increase your profits.

What does this have to do with health care? Under the current system, medicare and private insurance companies have contracts with most providers (hospitals and doctors). So, rates are capped. As independent businesses, many would like to expand to increase their profit potential. That’s where the government gets involved. You see, if you would like to expand your medical business, or if you would like to build a new medical facility in an area, the government requires that you work through the “Certificate of Need” section of the Department of Health and Services Regulation. This requirement includes existing hospitals that would simply like to add additional bed space. Big brother wants to make sure only approved hospitals can expand when central planning dictates that it is necessary. This is, of course, for the betterment of the community at large and has nothing to do with forcing business to bow before the throne of the local government officials.

“Government is not the solution to our problem; government IS our problem.” – Ronald Reagan (1st Inaugural Address)

As a quick return to our Economics 101 lecture, what impact does increased supply have on prices? Anyone? If you answered, “it decreases prices” then you clearly need to return to the progressive re-education program. Repeat after me, “when government artificially limits supply it lowers prices”. But, don’t take my word for it. Take a look at the NC DHSR web site:

“The fundamental premise of the CON law is that increasing health care costs may be controlled by governmental restrictions on the unnecessary duplication of medical facilities.” (Source: North Carolina Division of Health and Service Regulation Web Site)

You really have to love the ironic acronym of “CON” for Certificate of Need. This brings us to Step 1.

1. Eliminate the Certificate of Need laws in every state. Piles of unnecessary legal fees and financial “grease” applied to the wheels of government could be eliminated. The free market would dictate the supply of services. Prices would fall.

Let’s go back to Economics 101, again. What impact does increased supply have on prices? Repeat after me, “when government artificially limits supply it lowers prices”. As long as you continue to believe this, you will believe that our government has been encouraging lower prices by regulating the free market.

In keeping with the CON tradition above, state governments limit the insurance carriers who are allowed to sell in a given state. I have heard progressives argue that opening up competition would initially lower prices by allowing additional competition. However, in the long run, all this will do is serve to consolidate power in the hands of large carriers. Sadly, our progressive education system has vilified large companies to the point that “consolidating power” in the insurance industry is necessarily perceived as bad. Economies of scale will dictate that larger carriers, insuring many people across multiple states will be able to offer lower prices. This could drive, “Teddy’s Small Town Discount Health Insurance Company” out of business. Of course, there is no “Teddy” in the first place. The state government has already made it so difficult to obtain a license that the power is already in the hands or large carriers. If our hypothetical “Teddy” did exist, you have to ask yourself would you be willing to pay higher prices so Teddy could stay in business? Teddy does serve as a nice straw man, however. The big insurance companies that have state contracts want everyone to believe that their exclusive deals do not increase prices. They just prevent the evil large companies from driving “Teddy” out of business.

2. Allow consumers the right to purchase health insurance from any carrier willing to sell the insurance.

Let’s go back to Econ 101 and see if we can apply it to automobile insurance. If every auto policy in your state required liability, collision, uninsured driver, under-insured driver, oil changes, tire rotations, new tires, annual pine tree air freshener replacement, naugahyde shining and fuzzy dice washing, what would that do to the price of insurance? If you answered, “when government artificially limits supply it lowers prices” please enjoy your Kool-aid as you take your civil service exam. Seriously, it would clearly drive prices higher.

What does this have to do with health insurance? The auto insurance comparison is perfectly applicable to the health insurance requirements by state governments today. You cannot purchase “liability” insurance to cover yourself for a catastrophe. The insurance companies are disallowed by law from providing that type of insurance. Instead, every policy has to be a Christmas tree decorated with ornaments from every type of special interest. States and municipalities require things like: infertility treatments, sex change operations, and abortions in every policy. This, of course, drives up costs for everyone.

3. Allow insurance companies the freedom to expand their offerings to match the market demands. If you want to include coverage for your fish’s filtered water intolerance, by all means buy the policy. But, leave the rest of us out of it.

One last quote from “The Gipper”:

“The nine most terrifying words in the English language are, ‘I’m from the government and I’m here to help.'” – Ronald Reagan

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I agree with each of these three points, however, your first point appears to address CON for insurance products. I’m not familiar with this restriction, perhaps a few sentences of explanation? I know that states also require CON for hospital expansion and for the purchase of certain medical equipment, e.g. MRI scanners. Do you think these CONs should be lifted as well?
Have you looked at other constraints on supply? I’ve heard by haven’t confirmed that the AMA regulates the number of medical school admissions — that there are regulatory caps on how many med students any particular institution can enroll. If that’s true, that’s another artificial limit on supply. There are too many lawschools and too many attorneys. While that has led to some excesses, the excess supply has kept most legal services affordable and created tremendous competition, particularly in high volume areas.

After re-reading, I can see that I made the initial point confusing. I believe that governmental restrictions on supply in limiting the number of licensed insurers within a given state and the restrictions on expansion should both be lifted. In hindsight, I suppose I should have titled the article “4 ways…” as these should be separate points. The AMA limitations is another good point. This, along with a long list of other interventions into the market, could serve to lower the cost of medical care. However, the statist objective of centrally planning the market will have quite the opposite effect. There is a great C.S. Lewis quote that summarizes what is going on with the progressive movement: “Of all tyrannies, a tyranny sincerely exercised for the good of its victims may be the most oppressive. It would be better to live under robber barons than under omnipotent moral busybodies. The robber baron’s cruelty may sometimes sleep, his cupidity may at some point be satiated; but those who torment us for our own good will torment us without end for they do so with the approval of their own conscience.”